Components of the Current Account (Cambridge International A-Level Economics)

Components of the current account of the balance of payments

• The balance of payments is a record of all financial transactions between a country and the rest of the world over a given time period
• The current account records trade in goods and services and income flows between a country and the rest of the world - it has four components

Balance and imbalances

• Exports of goods and services and income received from abroad are recorded as credits (money flowing in)

• Imports of goods and services and income paid abroad are recorded as debits (money flowing out)

  • Surplus - total credits exceed total debits across all four components - the country is a net receiver of funds
  • Deficit - total debits exceed total credits - the country is a net payer of funds to the rest of the world; must be financed through the financial account or by running down foreign exchange reserves
  • Balance - total credits equal total debits

Calculation of the current account balance

• Balance of trade in goods = exports of goods - imports of goods
• Balance of trade in services = exports of services - imports of services
• Balance of trade in goods and services = balance of trade in goods + balance of trade in services
• Current account balance (CAB) = balance of trade in goods and services + primary income balance + secondary income balance

Worked Example The table shows data from Country X's balance of payments accounts. Calculate the balance of trade in goods, balance of trade in services, balance of trade in goods and services and the current account balance. State whether each represents a surplus or deficit.

Component	$m
Exports of goods	450
Imports of goods	580
Exports of services	320
Imports of services	210
Primary income - credit	90
Primary income - debit	140
Secondary income balance	-30

Calculation	Working	Result
Balance of trade in goods	450 - 580	-$130m deficit
Balance of trade in services	320 - 210	+$110m surplus
Balance of trade in goods and services	-130 + 110	-$20m deficit
Primary income balance	90 - 140	-$50m deficit
Current account balance	-20 + (-50) + (-30)	-$100m deficit

Despite a surplus on trade in services, deficits on goods, primary income and secondary income produce an overall current account deficit of $100m

This illustrates why analysing all four components separately is essential before drawing conclusions about a country's external position

Worked Example The table shows the current account of a balance of payments for January 2021.

Component	$m
Exports of goods	15,000
Imports of goods	17,000
Services - credit	2,500
Services - debit	2,000
Primary income - credit	100
Primary income - debit	1,000
Secondary income balance	60

What is the current account balance?

A. - a deficit of $2,340m

B. - a deficit of $2,000m

C. - a surplus of $2,000m

D. - a surplus of $2,340m

Answer: A

Worked solution

Balance of trade in goods: 15,000 - 17,000 = -$2,000m

Balance of trade in services: 2,500 - 2,000 = +$500m

Primary income balance: 100 - 1,000 = -$900m

Secondary income balance: +$60m

Current account balance: -2,000 + 500 + (-900) + 60 = -$2,340m deficit

• Option B is the trap - students who only calculate the trade in goods balance (-$2,000m) and ignore the remaining three components will select B. This is the most common error on current account calculation questions and reflects the misconception that the current account consists only of trade in goods